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02688 ENN ENERGY
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29/05/2018 17:52

No impact on Chinese gas distributors from gas price hike

[ET Net News Agency, 29 May 2018] Moody's Investors Service said the alignment of
city-gate natural gas prices for residential users with those for non-residential users
has no immediate impact on the ratings of Chinese downstream gas distributors, because any
resultant price increase will likely be passed on to the end-users.
On 25 May, the National Development and Reform Commission (NDRC) announced that it will
(1) align the city-gate prices of natural gas for residential users with those for
non-residential users, with a maximum adjustment of RMB0.35 per cubic meter; and (2) adopt
a flexible and market-oriented mechanism for natural gas pricing for residential users,
effective 10 June.
City-gate prices refer to the regulated cost at which downstream gas distributors in
China purchase natural gas from pipeline operators.
"The potential increase in gas procurement costs is manageable for our rated downstream
gas distributors because they can pass the cost increase on to end-users and their
exposure to residential users is manageable," said Ralph Ng, a Moody's Assistant Vice
President and Analyst.
Moody's expects the alignment of the two gas prices will increase gas procurement costs
for downstream gas distributors, as residential rates had been around 20% on average lower
than non-residential rates.
Nevertheless, Moody's expects limited impact on the distributors' overall dollar
margins, as they should be able to pass the price increase on to end-users with limited or
no delay.
Moreover, residential gas sales account for only a small portion of the downstream
distributors' overall profits. The average gas volume sold to residential users is about
20% for five rated gas distributors, and the impacted portion will be even smaller because
the prices hike will not affect the five provinces (Guangdong, Guangxi, Guizhou, Yunnan,
Fujian) where city-gate prices have been aligned.
"The new mechanism reflects the government's intention to further liberalize the gas
sector, which is credit positive for the industry because it will improve the
predictability of and rationalize the current tariff framework," adds Ng.
The new mechanism was prompted by historical low city-gate natural gas prices for
residential users, on average at RMB1.4 per cubic meter, which were below the domestic
production costs for natural gas. Twenty-five provinces have had no adjustments in such
prices since 2010.
The new mechanism also introduces a flexible pricing adjustment based on the benchmark
city-gate prices, with a cap at 20% to be implemented a year from the effective date and
no floor, depending on market demand and supply for natural gas.
Moody's expects the more market-oriented tariff structure -- when compared to fully
government-dictated prices -- will strengthen the link between the production costs and
retail tariffs of natural gas in China.
Specifically, the mechanism will incentivize upstream gas suppliers to provide gas to
meet growing demand, while downstream gas distributors could choose to invest in gas
storage facilities to achieve additional profits at times when city-gate prices are high.
(KL)

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